Page 7 - FSUOGM Week 48 2021

FSUOGM COMMENTARY FSUOGM

effectively turning it into a commodity similar to discloses pricing terms in individual supply
oil, which is almost all transported by ship. Pre- contracts, making it difficult to determine to
viously the default option was to link gas prices what extent each of its customers in Europe has
to oil prices in acknowledgement that the price suffered as a result of the current supply con-
of both is linked. Now gas is becoming a com- tract. However, it is understood that Gazprom
modity it is possible to increasingly let markets continues to have 100% oil-indexed contracts
like the Dutch TTF hub set the price of gas. with companies in Bosnia-Herzegovina, Greece,
In practice as pipelines and politics still play North Macedonia, Serbia and Turkey, and it is
an important role in the gas business and LNG these markets that have consequently seen a
production is still a relatively young business, much smaller increase in their energy bills since
pricing of gas deals are a mix of both negoti- the crisis took hold. Some companies elsewhere
ated deals, some oil-price linking and averaging in east Europe have partial oil indexation as well.
prices on the Dutch TTF hub.
Oil indexation has been used for decades Serbia
in natural gas supply contracts and essentially A notable example of a country that has been
involves linking the price in that contract to the shielded from the gas crisis by sticking with oil
average price of oil and sometimes other petro- indexation is Serbia. Serbia’s close political rela-
leum products over time. Suppliers have gener- tionship with Russia has no doubt also helped it
ally favoured oil indexation as it provides greater secure a favourable price for gas.
price stability, providing the certainty that they Serbian President Aleksandar Vucic said on
need to invest in supply projects sometimes November 25 that his country had secured an
worth billions of dollars. “incredible” gas price from Gazprom of only
On the other hand gas-based pricing, oth- $270 per 1,000 cubic metres over the next six
erwise known as gas-on-gas pricing, is when months, following talks in Sochi with his Rus-
prices are determined purely based on the inter- sian counterpart Vladimir Putin. In contrast, the
play between gas demand and supply. There has December delivery contract at TTF was trading
been a steady shift away from oil indexation and at around $1,070 per 1,000 cubic metres on the
towards hub pricing over the last decade, largely same day.
because prices at hubs have been cheaper than Putin “has shown friendship towards Serbia,”
under oil-indexed contracts, and an amply-sup- the Serbian leader said, who also earlier boasted
plied market has given buyers more power to that Serbs would be able to spend Christmas “in
demand hub pricing from their suppliers. their T-shirts” as energy supplies would be so
Pricing reforms have not moved forward at abundant.
the same pace across Europe. Those member “We managed to get … for the next six
states more closely aligned with EU policy led months a gas price of an incredible $270, so
the way, but others in the east progressed at a that our price does not change; we also got an
slower pace. And some aspiring EU members increase in the amount of gas in those six months
have only begun to adapt their energy markets and we got flexibility [in monthly delivery], for
to standards set by Brussels. which I especially begged Putin,” he said.
While the extent of the shift in Gazprom’s Serbia gets most of its gas from Russia, save
sales from oil indexation to hub pricing in for a small amount it produces domestically. But
Europe is clear, the company very seldom its supply contract with Gazprom is due to expire

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